It is becoming increasingly difficult to make a living out of
insurance. There's more than enough reasons for brokers and
insurers to wonder anxiously whether they have a divine right to
prosperity any longer. Here are some of them: the emergence of more
sophisticated corporate insurance buyers, powerful consumers lobbies, a
governmental view of insurance as an exploitable instrument of social
justice, competition from other financial services industries, the
development of new alternative markets, increasing nationalism, and the
legal profession's everpressing need to feed its increasing tribe.

London is no exception to these worldwide pressures. There are, in
effect, problems on all fronts. Take Lloyd's for example.

One of the founding members of the Association of Lloyd's
Members, the organization set up in 1980 by the name whose individual
wealth capitalize the underwriting syndicates that comprise the
Lloyd's market, recently wrote a letter to the daily insurance and
shipping newspaper, Lloyd's List, demanding a referendum among the
names on whether their liability for claims should extend beyond their
Lloyd's deposit. Currently, it extends beyond their deposits, to
the limit of their entire wealth, in fact, if this is necessary to meet
claims.

This is a matter about which Lloyd's names are very sensitive
nowadays. In 1985, the results of individual Lloyd's syndicates
varied from a 19 percent profit to an 18 percent loss. Currently, the
Outhwaite syndicate names together face losses which could reach 1
billion pound sterling, which, of course, would bankrupt some of them.

The argument of those who are urging a change at Lloyd's to
limit their liability, in much the same way as a stockholder's
liability is limited to the value of his holding, is that the current
system represents the law of the jungle. Moreover, it is not in
Lloyd's interests to have names bankrupted when the system of
individual responsibility could be protected by a collective safety net.
The idea is that Lloyd's should not really be a marketplace of
competitors but more like a department store where the losses on, say,
perfumes will ultimately be covered by liquor, etc.

Well, Lloyd's would not be Lloyd's if such a change came
about. That is no reason why it should not, of course, but what perhaps
is the effect it would have on the security of the Lloyd's policy.
This is why I think it will be resisted to the bitter end by
Lloyd's Council.

Currently, Lloyd's boasts in its Global Report and Accounts,
as of December 31, 1988, that the ratio of premium income to
"means" is 0.9:1. This cannot be understood until you know
what is represented by "means," i.e., the name's deposit
which he must lodge with Lloyd's as security for underwiting done
on his behalf, the name's personal and special reserve funds which
are extra amounts held in trust by the name's underwriting agent
and the name's personal wealth. Everything else the name is worth
above and beyond his deposit and personal and special reserves
Lloyd's verifies for all prospective members.

For the year 1988, names' means totalled 7,014 million pound
sterling. The means were made up of 3,522 million pound sterling in
Lloyd's assets, consisting of 2,831 million pound sterling in
deposits, 465 million pound sterling in personal reserves and 226
million pound sterling in special reserve funds, and 3,492 million pound
sterling in non-Lloyd's assets.

In 1988, Lloyd's premium income before reinsurance was 6,177
million pound sterling. Thus, the above ratio of 0.9:1 represents 6,177
million pound sterling divided by 7,014 million pound sterling.

What this is all leading up to is that if names staked only their
deposits as ultimate sec urity for payment of claims, the change which
some are urging, then the ration would be changed from 6,177 million
pound sterling to 2.831 million pound sterling, or 2.2:1. This ratio of
capital to premium would make Lloyd's no better security than many
other insurance companies.

As I said, Lloyd's is not going to let go, without a fierce
struggle, its reputation for financial soundness by giving in to the
curent demand for "limited liability." But it is a worry that
the demand is there at all.

Aviation Losses

The aviation insurance market is one of the numerous sources of
extreme anxiety for insurance pople these days. Suffice to say, by way
of an endpiece, that worldwide airline premiums this year were $450
million, an amount which would be gobbled up by one wide-bodied jet
disaster in the United States. Meanwhile, losses for the year at August
1 were $294 million, on line for an underwriting loss of $54 million by
year end.

Chris F. Best is editor of Foresight, a London-based risk
management and insurance journal published by Risk and Insurance Group
Limited.

COPYRIGHT 1989 Risk Management Society Publishing, Inc.
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